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Breaking Down Blockchain for Lawyers

Blockchain enthusiasts claim that the discovery of blockchain is on par with the discovery of the internet. This technology could have a huge impact on a lot of markets, including the legal industry. But a lot of people still don’t fully understand what blockchain is or why it’s relevant, so we decided to make it easy (or at least easier) for you. Below is a basic description of where blockchain came from and how it works. As for how it applies to legal professionals, check out the podcasts below.

The Origin of Blockchain

In 2008, a paper was published under the pseudonym Satoshi Nakamoto entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This might seem irrelevant since blockchain isn’t even in the title, but blockchain was originally designed as a way to securely transfer the cryptocurrency Bitcoin. The technology has since been adapted for other uses such as data and identity management, protection of intellectual property, smart contracts, and more.

Satoshi Nakamoto: To this day, no one knows who Satoshi Nakamoto is or even if it was a name used by a group. He has since distanced himself from Bitcoin and blockchain so that other developers can experiment with the technology and make it their own.

How it Works

There’s a lot of science and technology jargon that goes into describing how exactly blockchain functions, but here are the basics in plain, basic English.

Blockchain is the near equivalent of a database that is synchronized, public, distributed, and protected. We’ll explain each of these aspects in further detail.

Synchronized

Picture a basic paper ledger. It keeps actions and transactions organized in a way so that really anyone, whether they were involved in the transactions or not, can go back and see the chain of events. A blockchain works in a similar way. Whether you’re storing information, documents, or maintaining a contract, a blockchain will keep track of each action or transaction. In the case of sending a document to a client, every edit and draft will be saved by blockchain. But that’s not where the advantages of using blockchain technology stops. With a paper ledger, you have to physically send the paper back and forth to the different parties until you settle on a document that works for both of you. Even now that snail mail is a thing of the past, documents are sent via email which can still be a waiting game. With blockchain, changes made by either party are instantly synchronized. If you use Google Docs or Sheets, the concept is similar. You can edit a document and the person on the other end can see those edits in real time and make edits of their own simultaneously.

How this works is the blockchain checks itself and reconciles all changes made every ten minutes. When it checks itself and all aspects make sense, i.e. the transactions are in the right order and any changes were made by the right people, that information is stored and referred to as a block. That’s where the name comes from. All these blocks come together to create a chain of transactions in the same way different lines of information come together to make a ledger.

Block: Every ten minutes a new block is created that documents any updates of a transaction.

Public

Banks maintain ledgers to keep track of every transaction that happens within their system but the average person is unable to see these ledgers. This means we have to trust that banks are doing a good job protecting and monitoring our money and information and it is through these trusted third parties that any transactions are facilitated and approved. Blockchain, however, is not only free from the control of large financial organizations, it is also public. Though individual identities remain anonymous, their name encrypted, all activity is public so that anyone within the blockchain can observe any transactions.

Trusted third parties: An entity which facilitates interactions between two parties.

This is an important aspect of blockchain for a couple of reasons. Most importantly, this makes the system transparent. With so many eyes on the transactions, there is less likelihood of double spending or other dishonesty. Another important benefit to a public ledger is the elimination of trusted third parties. Even if you’re not using blockchain, you’re putting your trust in something. With our finances, this is usually banks. But banks are not immutable and can be hacked. Plus, working through a third party can be slower and more expensive. With blockchain, you can interact directly with someone and your transactions are monitored by both you and the network of people involved in the blockchain.

Double Spending: A scam in which the same digital currency is spent more than once.

Distributed

Decentralization, or having a large network of users, is another characteristic that makes blockchain functional. Rather than being stored on a single hard drive or computer, blockchain is hosted by millions of computers simultaneously. These computers connected to the blockchain network are called nodes and and are run by miners that validate and relay transactions. This means, like the internet, a blockchain can’t be controlled by a single entity and, unlike the Death Star, doesn’t have a single point of weakness. This decentralized technology is good for both security and communication in that it can’t be easily corrupted and it further eliminates the need for a middleman.

Nodes: Computers that are connected to and facilitate the blockchain network.

Miners: Solve complicated computational puzzles in order to verify transactions within blockchain. For each puzzle solved, they earn a certain amount of Bitcoins.

Protected

Along with having a network of users to keep your transactions secure, blockchain is also protected by cryptography. Each user has a unique key, kind of like a serial number, and which allows them to edit the parts of the blockchain that they own. Edits that are made by people without the proper keys are rejected by the system and not added as a block. So new changes can’t be made without the proper identification.

But cryptography also applies to the past blocks, or entries in the digital ledger. Each block has a unique number, or a hash, that, when edited, updates so that a new number is tacked onto the old one, creating an entirely new hash or unique number. If a hacker attempted to change any of these numbers, it would corrupt the whole chain. Of course, an attempt to change these numbers is probably all they could manage anyway. In theory, it’s possible to break into something protected by cryptography, but it would take an obscene amount of computational power to figure out just one number. By the time a hacker decrypted one number, another block with another number will have been created rendering the past numbers obsolete and useless. This means that once transactions are completed, they cannot be changed or deleted.

Cryptography: The use of various techniques for secure communication in the presence of third parties. In blockchain, it is a form of encryption that turns information, like names, into unique numbers.

Hash: A hash is the result when you take an input string of any length and giving out an output of a fixed length. Or, it’s assigning a number to a set of information.

Of course, this is an oversimplified description of blockchain technology and you’re probably still confused in a lot of ways. Luckily, blockchain is like the internet in that you don’t necessarily have to know how it works in order to use it. For more information about how you can implement this technology in your own practice or what the future holds for blockchain, check out the podcasts below. Also, be sure to check out the On The Road episodes from MIT which discuss artificial intelligence and bitcoin along with blockchain.

In this report from On The Road, host Laurence Colletti talks to Patrick Murck about the effects of blockchain and regulatory technology (RegTech) on the long standing framework for financial regulation.

In this report from the 2017 Clio Cloud conference, Joshua Lenon discusses using Bitcoin and other advantages to using blockchain technology, like creating an unalterable record and authenticating documents.

Brian Kuhn, global co-leader for the IBM Watson legal practice, talks about why lawyers should be interested in cognitive computing (or augmented intelligence) and how blockchain works together with AI.